The Syriza coalition in Greece is facing obstacles just months after it took power in January. These include an intransigent European Central Bank and an unyielding European Council. In particular, the ECB rejected Greek proposals to short-term bridge finance to give more time for negotiations of medium and longer-term structural reforms. We are once again on the brink of crisis, as Greece and its creditors struggle for a deal before the June deadline. With the possibility of Greece’s exiting the eurozone, this is a real possibility.
The Atlantic seems to be in need of little help as well. Yanis Varoufakis was on a trip to Washington earlier in the month. Neither the International Monetary Fund nor the US government provided much assistance, hope, or new ideas.
As it turns out, Europe has a solution: The European Investment Bank (EIB) is the largest lender in the world that is backed by more countries than one. The EIB should make vital infrastructure investments, such as roads and schools, to help not only the economy of Greece sink but all other countries in the Continent that are also suffering from recession. This could stimulate private investment and revitalize Europe, thereby ending the cycle of crisis after crisis.
Not only for Greece, but for Europe and the global economy as a whole, time is running out. In the end, Greece’s default may not be as bad as letting a good crisis pass by. We don’t want to miss the opportunity to solve a euro-related problem.
Flawed Right From The Power Beginning
Since the 1960s, both American and European pundits have pointed power out that a euro-based monetary union without federalism (as opposed to the formation of a United States of Europe) was flawed. The 1992 Maastricht Treaty, which created the European Union, set out strict fiscal targets and no central fiscal authority. This gave rise to the structural imbalances that today are the root of the problems. This made it more likely that financial and fiscal crises would occur, especially after the Economic and Monetary Union was establish seven years later.
These observations may be true but there are no easy ways to fix bad history or build federalism in a crisis. It is difficult to pool resources (excessive savings) in Europe and put them in other areas where they are most needed. While sharing the burdens between member states, it is impossible to have federalism. This requires a fiscal federalism that combines common borrowing and tax policies with money transfers between regions.
Investments Can Bring About Growth Power
There are still ways to alleviate some of the problems in the EU’s depressed economy, even if its institutional design is flawed. While we are often focusing on the back-and-forth between Germany and Greece, it is easy to forget about the existence of EIB, which is the European Union’s central bank. The EIB’s shareholders are the 28 EU member countries. It was establish to help the region achieve it policy goals. Makes small loans to the private sector, but primarily today it is a relatively small institution.
It could also expand its operations and lend to public investment. The EIB can mobilize idle savings across Europe and other parts of the world to boost productivity, growth, and employment via public and private investments. It could also increase aggregate demand, which is a fancy way of saying grow the overall economy.
It could be use in conjunction with the ECB’s quantitative easing programme, which involves purchasing certain types of bonds to lower interest rates. The EIB could issue euro bonds that are back by all member states, and the ECB might purchase some. This would bring new money to the system and the central bank’s guarantee could encourage private savers buy more of these euro bonds.
EIB Working On A Plan To Move
Although the European Fund for Strategic Investments is still being ratified, it is expect that it will support investment of around 315 billion euro (US$343 trillion) mainly from private sources. It is a good start. Greece does not require that much. Even a few billion euros in investment projects at this stage will be a boost to the bank. Future commitments will increase credibility and stability, which will attract private investment later.
The EIB needs a capital increase to 750 billion euros, or even a trillion. This would be an increase from its current 243 billion euro capitalization. This would enable it to borrow more money and invest trillions more. This could be the financial foundation for a Europe-wide program of investment and creation of jobs, beginning with the most vulnerable areas like Spain and Greece. Germany must be the economic engine of Europe and play a key role here.
The Multiplier Effect Power
Next, choose the projects that have the highest multiplier power effects and greatest potential to create jobs in economically distressed areas. This could done in Spain, Portugal, Italy, Spain and Portugal. Public sector investment is crucial to achieve this. My research, both in my own capacity and with others in the field of public finance and related fields, has led me to a positive theoretical conclusion that’s been supported by empirical evidence. In depressed economies, private investors wait for the public sector to invest in infrastructure before they follow suit.
Private and public investments can be combined in most cases to create multiplicative effects on growth, employment, and spending. Our research showed that both multilateral and Japanese bilateral assistance had ripple effects. Public investments in roads and infrastructure resulted in ripple effects that doubled, or even tripled, the initial investment. Similar effects can also be seen in the investment in schools, which in turn leads to an increase in employment.
A Marshall Plan For A New Era
Europe could start with an experiment that matches public investment with money from private sector. The EIB would expect that every euro spent would increase overall output by two to threefold. If the program was successful, we could continue it with a more ambitious plan to create a 21st century version of the European Recovery Program (better known as the Marshall Plan).
This four-year, $47 billion program was designed to revitalize Europe after the war in Europe. It is also necessary for Europe now that it is facing crisis. Europe must show more economic and financial imagination to avoid the worsening crises. That will follow if it continues on its current course. It also needs to be bold to create a better future.
There are many other constructive steps that can follow the proposed EIB growth-through-investment idea. These crucial discussions should be attended by both progressive economists and political-economists around the world. The future of Europe and in a real sense global prosperity may hinge on the actions. Taken in Europe over the next few months.